Stephen Beer (www.stephenbeer.com)

Wednesday, July 23, 2008

By Delphine Strauss and Jane CroftPublished: July 23 2008 03:00 Last updated: July 23 2008 03:00

Banks should pay up front to build a multi-billion pound fund that would help compensate depositors quickly when an institution failed, Mervyn King told MPs yesterday.The Bank of England governor's comments come as many banks struggle to rebuild their balance sheets, making ministers wary of forcing the industry to pay into a pre-funded pool of assets that would help meet the costs of dealing with future banking failures and guaranteeing savers' deposits.

The Bank is probably right on this one. The Governor suggests the amount paid by a bank should depend on the risk it takes. Angela Knight is reported as being sceptical about how this would be measured. Yet, combined with regulation making the location of debt more transparent and bringing it back onto balance sheets, the amount a bank paid into a fund should be determined by the amount of leverage it has. However, this system should not only apply to banks with retail depositors but to other banks too, given the impact they may have on the system. This is a market-driven solution. The Fund need not only be used to compensate depositors, as I proposed some months ago.